Congress Should Adopt Mortgage Modification Bill Now

07 Nov Congress Should Adopt Mortgage Modification Bill Now

A bankruptcy court can change the repayment schedule and amount for business property, apartment complexes, vacation homes, cars and boats in Chapter 13. The one thing it can’t change is the thing you need most: Your home mortgage. For the good of borrowers, taxpayers and even mortgage lenders, that should change – now. If you agree, you should say so — now.

Two bills are pending now in Congress — S.2136 in the Senate and H.R.3609 in the House — that would allow consumer debtors to rewrite their mortgages to reflect current market realities. With home values crashing and adjustable rate mortgages poised to push monthly payments out of reach for hundreds of thousands of families, the reality is that a flood of foreclosed homes will be coming onto the market in the next couple of years unless the situation changes dramatically and quickly. These bills could save those homes — and protect the property values of neighbors and the tax base for the whole community.

Mortgage servicers have claimed they are willing to work with borrowers to adjust their loan obligations. These are the same mortgage servicers who are going into bankruptcy, selling their assets at distressed prices, and laying off tens of thousands of employees. Even if you believe they want to help — something which is not always in their own financial interests, even if it is beneficial to their investors or the homeowners — do they have the capacity to help? The evidence suggests they do not. A Moody’s Report from September indicated that mortgage servicers had only put together such work-outs for one percent — 1% — of adjusting mortgages this year.

Congress is moving forward with legislation to curb some of the abuses in the mortgage lending marketplace. Good. It is well past time that mortgage lending abuses be reined in. Perhaps it will prevent another bubble in the real estate market like the one we see now. But it’s no consolation for homeowners facing mortgages adjusting out of sight. These homeowners — potentially as many as 2.2 million families, according to the Center for Responsible Lending — face the real prospect of losing their homes to foreclosure. The investors in their mortgages face huge losses as these homes are resold in a declining market — after absorbing thousands of dollars in legal and maintenance costs. And former neighbors face collapsing property values leading to loss of funds for public services, schools, police forces and health care.

The legislation now pending in Congress would allow homeowners in Chapter 13 to rewrite their mortgages to reflect current market value with market interest rates for the long haul. In other words, it asks the investors to take a small loss to avoid a bigger one. The investor still has a lien on the debtor’s home and has the remaining investment protected from inflation by a market rate of interest. The investor doesn’t have to absorb the costs of foreclosure or the added losses from a fire sale real estate market. The mortgage servicer gets a performing mortgage in the portfolio again, although it loses all those additional fees it would charge for processing the foreclosure.

These changes have applied for decades already to mortgages for investment and vacation property, for car and boat loans. All of these loans continue to be made despite the “risk” of modification in bankruptcy — but lenders on those types of collateral might be a little more careful to not lend too much over and above the real value of the property, or the ability of the borrower to pay. Does anyone seriously think that is a bad thing?

The credit industry, although claiming to be in favor of “sensible” legislation, is rallying to oppose these bills. It claims modification of mortgages will be too complicated, wreck the secondary market in mortgages, and reduce credit to weak borrowers. Moody’s Chief Economist, Mark Zandi Ph.D, disagreed, saying, “…this legislation will not significantly raise the cost of mortgage credit, disrupt secondary markets, or lead to substantial abuses. Given that the total cost of foreclosure is much greater than that associated with a Chapter 13 bankruptcy there is no reason to believe that the cost of mortgage credit across all mortgage loan products should rise. Indeed, the cost of mortgage credit to prime borrowers may decline.”

Congress needs to know that people support sensible changes to bankruptcy law to help homeowners save their homes especially if it will actually help reduce the total losses that are going to roll through the mortgage markets. Contact your Senators and you Congressman today: You can find and e-mail your Representative here and your Senator here.

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2019 I served on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. Our Report recommended numerous changes to improve bankruptcy law to make it serve everyone in the process more effectively. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website:

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